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Sir how are you?hope ok.need some help regarding the following question.Thank you.
Q M
M leased its head office during the current accounting period and the agreement terminates in six years’ time. There is a clause in the operating lease relating to the internal condition of the property at the termination of the lease. The clause states that the internal condition of the property should be identical to that at the outset of the lease. M has improved the building by adding another floor to part of the building during the current accounting period. There is also a clause which enables the landlord to recharge M for costs relating to the general disrepair of the building at the end of the lease. In addition, the landlord can recharge any costs of repairing the roof immediately. The landlord intends to replace part of the roof of the building during the current period. (5 marks)Required: Discuss how the above item should be dealt with in the financial statements of M.
Sir my answer is
Ias 17 (lease) and ias 16(property plant and equipment) is relevant to the scenerio.The issue here is whether it is a finance or operating lease.As per ias 17 finance is is one where risk and rewards incidental to the ownership is transfered and this is the case in the scenerio as M is responsible for any cost to be incured relating the internal condition and termination of lease so this is classified as finance lease.M should recognise an asset in his/her sofp at lower of the present value of minimum lease payment and fair value of the asset and depreciated over lower of lease term or asset life.M should also recognise a liability and this be dealt with ifrs 9.as per ias 16 cost of asset also include directly attributable cost for bringing the asset to the location or conditions necessary to operate the asset in a way intented by management.so the cost of the adding another floor should also be capitaised with assets cost and depreciated accordingly.Sir i also need clarification about followings
A contract that will be settled by the entity receiving or delivering a fixed number of its own equity instrument in exchange for a fixed amount of cash or another financial asset is an equity instrument.if there is any variability in amount of cash or own equity instrument that will be delivered or receive then such a contract is a financial asset or liability.
Thank you.The question clearly tells you what type of lease it is!
“There is a clause in the operating lease relating to the internal condition of the property at the termination of the lease”
The lease is not for substantially the whole of the asset’s life nor is it likely that the present value of the minimum lease payments is substantially the same as the arm’s length value of the building so, I’m sorry to say, you’re barking up the wrong tree.
The extra floor should be capitalised and written off over the 6 years remaining and a provision should be set up for the present value of the estimated cost of restoration to original condition, and that too should be capitalised
OK?
Where a company is contracted to issue a defined number or a variable number of shares for a fixed amount of cash then you’re looking at an IFRS 9 position
This is what you sent to me “A contract that will be settled by the entity receiving or delivering a fixed number of its own equity instrument in exchange for a fixed amount of cash or another financial asset is an equity instrument.if there is any variability in amount of cash or own equity instrument that will be delivered or receive then such a contract is a financial asset or liability.”
Which part of that is confusing?
Sorry sir.Actually i didnot get the whole thing its about why debt seems equity?i didnot understand the principle behind the whole paragraph to be honest.Thank you.
If there is no debt element and the contract is settled purely by an issue of shares, then the whole transaction is an equity instrument.
But if there is any variability in the amount of cash or the number of shares to be issued or received, then it’s a financial asset or liability and not, therefore, a pure equity instrument
Is that any better?
Thank you sir.Thats crystal clear now.sir how you so good. your knowledge is just incredible.wish we had the same understanding and knowledge!!!!.Thanks a lot.
Sir could you please give a look to dec 14 question no 2(b).about guarantee contract.could you please give me an answer in simple way how to account for this.The answer provided is to complex and i am not geting it to be honest.Thank you.
Sir which factors we likely to take into account when determining residual value of an asset?Thank you.
Sir
when N.C.I is valued partially why any impairment to goodwill is entirely charged to parent?what is the principle behind this and when N.C.I is valued fair value basis than any impairment is proportionately charged between parent and n.c.i.why sir?Thank you.“when N.C.I is valued partially why any impairment to goodwill is entirely charged to parent?what is the principle behind this and when N.C.I is valued fair value basis than any impairment is proportionately charged between parent and n.c.i.why sir?Thank you.”
If you had watched the lecture, you would have understood this (and I cannot now begin to type out the appropriate lecture!)
So, please, let me ask you to watch the lecture where I explain that if the nci is valued on a proportionate basis, then there is no goodwill attributable to them so no impairment of goodwill is applicable to them
“which factors we likely to take into account when determining residual value of an asset?” -if you have a car, you must clearly agree that the car will not last forever. So, tell me, when do you expect to change your car? 2020? 2025?
And how much do you think that your car will be worth in 2020? Or 2025?
Ok, that’s the residual value – it’s your guess!
” could you please give a look to dec 14 question no 2(b).about guarantee contract.could you please give me an answer in simple way how to account for this.The answer provided is to complex and i am not geting it to be honest” – is this the question Kandy?
Then I need a proper reference because it’s not December 2014, question 2(b)
OK, I’ve found it. Now, what’s the problem (and don’t say “all of it”!) There must be something in there that you DO understand so tell what it is that you don’t understand
IFRS 9 Financial Instruments says that an entity should classify all financial liabilities as subsequently measured at amortised cost using the effective interest method, except for:
(a) financial liabilities at fair value through profit or loss. Such liabilities, including derivatives which are liabilities, shall be subsequently measured at fair value.
(b) financial liabilities which arise when a transfer of a financial asset does not qualify for de-recognition or when the continuing involvement approach applies.
(c) financial guarantee contracts as defined in the standard. After initial recognition, an issuer of such a contract shall subsequently measure it at the higher of:
(i) the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and
(ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue (now no longer exists)
In addition, financial guarantees and loan commitments which entities choose to measure at fair value through profit or loss will have all fair value movements in profit or loss, with no transfer to OCI.
Changes in the credit risk of liabilities relating to loan commitment and financial guarantee contracts are not required to be presented in other comprehensive income.
The accounting entries on the assumption that discounting would not be material will therefore be:
1 December 2012
Dr Profit or loss $1·2 million
Cr Financial liabilities $1·2 million
To record the loss incurred in giving the guarantee.30 November 2013
Dr Financial liabilities $0·4 million
Cr Profit or loss $0·4 million
To amortise the initial fair value over the life of the guarantee, reflecting the reduction in exposure as a result of the first repayment by the subsidiary.30 November 2014
Dr Profit or loss $39·2 million
Cr Financial liabilities $39·2 million
To provide for the calling of the guarantee – the difference between the possible $40 million call and the carrying amount of the guarantee of $0·8 million.Dr Financial liabilities $39·6 million
Cr Profit or loss $39·6 million
To move from the provision back to measurement at amortised initial value following event after the reporting period change in probabilities of the guarantee being called.An event after the reporting period is an event, which could be favourable or unfavourable, which occurs between the end of the reporting period and the date when the financial statements are authorised for issue.
The above is an adjusting event which is an event after the reporting period which provides further evidence of conditions which existed at the end of the reporting period.
Now then, Dewan, I’ve converted the answer into a reader-friendly format. The explanation for each of the journal entries is there for you and this, together with the detail of the question should (hopefully) make it easier to follow.
Those journal entry narratives are very important to give you a proper understanding of exactly what is going on so I’m hoping that, with it set out this way and with time to follow what’s happening, you will reduce your queries to just one or two points
(To say that you understand none of it would leave me with no option but to give a full 1.5 hour lecture on the subject!)
See how you get on, and let me know
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